2) Knowing how to model a company’s
performance. This is the hard part. This is the part
of modeling that is more art than science. How many
iPads will Apple sell next year? How about iPhones?
Experience, intelligence, and a clear
mind separate the amateurs from the
professionals.

I’ve discovered that looking at someone’s forward Apple
projections reveals a lot about what they think of Apple and
this is where things get interesting. Sell-side consensus for
Apple earnings per share currently stands at $32.35 for
fiscal year 2012 and $36.94 for fiscal year 2013. From a
stock valuation standpoint, these numbers are important, but
converting these numbers into growth, Wall Street believes
Apple will grow 18% in 2012 and 14% in 2013.

In order to put these numbers in context, I compare Apple’s
projected earnings growth to other technology companies:

Now we are getting a better picture of how Wall Street views
Apple. Tim
Cook and company are expected to outperform the
overall technology sector, growing earnings 14% in 2013, versus
a peer average of 7%. However, Apple’s 14% projected
growth in 2013 pails in comparison to current 70%
growth. What is going on here?

Instead of sell-side analysts “not getting it” - as
some independent Apple analysts say, I think anchoring
bias is the main culprit.

I thought Wikipedia
did a good job at trying to define anchoring in a few
sentences:

Anchoring and adjustment is a psychological
heuristic that influences the way people intuitively
assess probabilities. According to this heuristic, people
start with an implicitly suggested reference point (the
“anchor”) and make adjustments to it to reach their estimate.
A person begins with a first approximation (anchor) and then
makes incremental adjustments based on additional
information.

Sell-side analysts are comparing Apple to its peers too
much. Although analysts still believe Apple will outperform,
many are modeling Apple with a 5-10% technology industry growth
rate in mind. Apple’s growth is then pegged above this range,
albeit by only a small margin. Apple is being anchored to
its peers and corresponding lower growth rates.

Sell-side analysts may think Apple will sell a ton of
iPhone
and iPads, but end up with much lower Apple growth rates
because Apple’s peers are performing so poorly. To make matters
worse, much of this comparing, and anchoring,
is occurring on a subconscious level,
making it that much harder to acknowledge and
correct.

Meanwhile, independent Apple analysts aren’t subjected to
anchoring bias since they are only modeling Apple. In a
way, they are able to put Apple in a valuation bubble. If
independent analysts began to model Apple peers on a regular
basis, I would suspect anchoring would become a bigger issue
among the group.

As an independent Apple analyst, how fast do I think
Apple will grow earnings?